As the London property boom spreads out, doing nothing may no longer be an
option

Many years have passed since I last bought a house, so it has been a real eye-opener spending the past few weekends helping my eldest son look for his first property. Of course, it is impossible not to be aware, in general terms, of the rapid rise in house prices, especially in London. But until you actually enter the market, its insanity is not immediately apparent. Areas where I could afford to buy back in the early Eighties, even as an impecunious hack, are now completely out of the reach of a well-paid young City professional with excellent earning potential.

On Saturday we were looking at a new development in a part of north London that I had difficulty finding on the map. The flats have not even been completed yet but most have already been sold “off-plan” – and quite a few of them to overseas investors, principally Chinese. There was a Chinese speaker on hand at the “marketing suite” to deal with inquiries. To cut out the middle man, British developers have even opened offices in Shanghai and Beijing. It is estimated that at least 15 per cent of new-build property is sold abroad, and in central London last year just 27 per cent of new homes went to UK buyers.

In other words, though there is a lot of building now under way as the economy recovers, many of the properties are not going to British youngsters looking for a home but to absentee foreign investors seeking a safe haven for their cash. The Government’s Help to Buy scheme, which my son is hoping to use to get his foot on the ladder, is fuelling a boom that is making property even more attractive as an investment. London housing has become a global reserve currency.

This is having the twin effect of pushing up prices and further reducing supply. Stories are legion of people putting in offers thousands of pounds above the asking price only to find themselves outbid. It is hardly surprising to discover that prices in the capital rose in 2013 by 15 per cent.

For those of us in homes whose value has jumped to stratospheric levels we would never have dreamt of when we bought, this is great while it lasts, apart from the fact that the equity is locked up. But for young people trying to break into this market it is grim news indeed.

Related Articles

Back in 1982, when I bought my first property, the ratio of UK average incomes to house prices was 2.3; by 2013 it was 4.6. For first-time buyers in London, they are now at a record 7.5 times average earnings. However, there is one big difference – the cost of a mortgage is much lower. Interest rates back then were in double figures. So if you have the income today you can afford to borrow much more; the difficulty is raising money for the deposit, which is hard to save for when rents are so high.

Many first-time buyers are relying on parents to put up the deposit. With new-builds, the Government advances an equity loan to make this more manageable – but a sizeable chunk of cash still needs to be found (and, bizarrely, shown not to be the proceeds of terrorist money-laundering).

Of course, much of this is being driven by demand: London has its own economic dynamic and continued to grow even in the recession. The population is back above eight million, where it was in its heyday in the Fifties before the great flight to the suburbs. Now it is being boosted by immigrants who would rather settle there than anywhere else. There are not enough new homes to keep pace with population growth, let alone the additional pressure from foreign investors.

On the other hand, since London is a global city in a globalised economy, don’t we just have to put up with it – or move? But this isn’t just about the capital. Figures published yesterday showed that the ripple effects of the London boom are spreading across the country, with price rises of more than 6 per cent in the past year in some areas. The danger is that we have become vulnerable to economic problems in the countries where the people who have bought into our market live.

Should something be done, therefore, to choke off demand from overseas investors? Labour, for instance, has proposed that new-build homes should be marketed to resident domestic buyers first, rather than sold before they are built to investors around the world.

Interfering in the housing market is not a very Conservative approach – but the Government has already done just that by introducing its Help to Buy scheme. How long can that continue if it is helping to pump up an overheated market whose principal beneficiaries are speculators and investors?

The property boom is rapidly becoming one of the most important policy issues of our time: doing nothing and hoping it might have a happy ending may not be an option for much longer. Alternatively, we can just sit back and wait for it all to implode as, sooner or later, it must.